Copyright 2013 John T. Reed
I just completed a transaction that illustrates a way of thinking and approach to hyperinflation protection that I think readers would benefit from—especially the many readers who are members of USAA.
I think your rainy-day savings need to be abroad. Much of mine is already. I recommend AUD, CAD, CHF, and NZD. (Currency codes—Goggle them)
I have been a member of USAA since the spring of my senior year in college in 1968. It used to be a car insurance company for U.S. military officers, because they had trouble getting car insurance when stationed overseas. They have since expanded to families of military officers and enlisted men and State Department presidential appointees and to a wider array of consumer-finance services.
Their casualty insurance company is a mutual company. Mutual companies are owned by their members/customers, not shareholders. Within the insurance industry, mutual companies are regarded as sinecures. As a general rule, I have heard, non-mutual insurance companies do not want to hire people who formerly worked at a mutual company. I got a job offer from a mutual company coming out of Harvard Business School. They told me they got Fridays off all summer long that year (1977). Q.E.D.
USAA says that means for regulatory and legal reasons they have to set aside some of my money in what they call a “Subscriber Account.” I wish someone would give me the citations of those regulations and laws so I could check them. I would ask USAA but I previously tried to get a company policy they said forced them to cancel a policy of mine. They stonewalled me. The company is always headed by a retired U.S. military general.
My last annual statement about that Subscriber Account said the balance was over $6,700.00. That of course, is in USD (United States dollars).
As I explain at length in my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition, USD hyperinflation is possible. I would say probable but there is no need to debate that here.
Hyperinflation is possible. It will be devastating to all USD-denominated assets if and when it happens. And the ways to protect yourself from that are low-cost and low-risk. Like buying insurance actually.
My basic advice is to reduce the amount you have in USD-denominated assets and instead own hard assets and selected foreign currencies. You must have at least some of the latter for liquidity. You can’t buy a bag of groceries or fill your car gas tank with hard assets.
I was alarmed when I saw that $6,700 figure. That is a significant amount of money to most people and to me. It is in USD, which means it is at risk to be wiped out by hyperinflation.
And consider the nature of my $6,700 “subscriber account.” It is not a bank deposit. It pays no interest. (They give us back a little of it each year and add a little to it most years but there is no 1099 INT on it. It is not FDIC insured. If USAA went bankrupt, I expect I would be an unsecured creditor with regard to that money. Maybe worse. Creditors get treated better than owners in bankruptcy.
So I called USAA up and said, “How can I get my $6,700?”
They said I could only get it if I got rid of all my policies with them.
And what are those?
One Valuable Personal Property with an annual premium of $688.
What about my life insurance with you?
That is USAA Life Insurance Company which is a different company from USAA and has no connection with the subscriber account.
What about our banking and investment relationships with USAA?
Same thing. Those are USAA Federal Savings Bank and USAA Brokerage Services which are not related to your Subscriber Account.
They went on to say if I terminated the VPP policy, I would get the amount in my Subscriber Account in six months.
I would like to know the good reason for that delay. I’m guessing it’s a reason only a mutual company could love. Mañana Is Soon Enough for Me.
As the author of a book about hyperinflation whose first sentence is, “It could happen tomorrow,” having that much money in USD for six months for no good reason scares me.
So cancel the policy? Wait a minute, tiger. The First Law of Wing Walking applies: Do not let go of one thing until you have hold of another. With insurance, you must arrange for the new insurance company to cover the risk in question before you cancel the old policy.
If I had to move the life insurance policies, that would have been a concern because it would require a new physical and would start at age 66 and might therefore have a higher premium for the same amount of coverage. Worst case, you may be unable to get new life insurance at all because of your physical.
But as I said, I did not have to do that because USAA Life Insurance Company is not part of the Subscriber Account mutual company.
I did have a little bit of hassle because the new insurance company required that I get a couple of new appraisals of items being insured.
I got one at half price because they were just updating a prior appraisal. The other, which came from the seller of the item in question, was free—perhaps because it said the value had not changed.
Once the new policy was “bound” as they say in the business, I called USAA and canceled the VPP policy. I followed that up with a letter. They promised to send me my $6,700 in six months.
They also said I could come back and again buy casualty insurance from USAA and that I would not have to post $6,700 bond or anything. If I did that, the Subscriber Account would start over again accumulating money as it first did for me in 1968.
So I recommend to similarly situated readers that they terminate and thereby liberate their USAA Subscriber Account. If they want to go back to USAA for the policies in question after that, they can do so without any penalty for the “withdrawal” of the Subscriber Account money.
Now what about the six months?
On Wall Street, they would probably buy a six-month futures contract to buy one of my for recommended foreign currencies. Or they might hedge with some sort of short sale of USD for six months.
High finance that is probably too much trouble and expense for this size transaction. Let’s see if we can come up with a faster, simpler, cheaper way.
What I did was just wire $6,700 to one of my New Zealand banks. With that bank, that amount of USD bought me $7,854.32 in NZD. That is a conversion rate of $1NZD = $.853034 USD.
I had never done a wire transfer with this bank before. I asked what they currency-conversion rate would be coming the other direction. Would you believe $.779280? That’s a $.853034 - $.779280 = a $.073754 buy-sell spread. That is $.737540 ÷ $.779280 = 9.437%. Ouch! I’ll try buying my NZD elsewhere in the future.
This particular New Zealand bank is the tiny one I requested my New Zealand grad school classmate recommend to me. I wanted a tiny bank on the theory that they would be less concerned about FATCA taking effect in 2014 because they probably have no dealings with the U.S.
But tiny also has some disadvantages. I had to involve three or four banks in the wire. My local bank is also relatively small. They have to use a big bank to send wires. Plus the tiny New Zealand uses a big international bank—HSBC—to receive wires. So I had to put extra instructions in the wire form to make sure the money flows through HSBC at 1 Queen Street in Auckland—the bank branch where we got our first ATM withdrawal of NZD in New Zealand—to the tiny bank where my account is.
I sent an email to my banker at the tiny New Zealand bank to tell them to look for the wire and tell me when they get it. I also go online to my account there monthly and will look for it myself.
Now what I would like to do to finish this off is borrow the $6,700 at a fixed rate and pay it off in six months when I get the check from USAA. If the hyperinflation hit during the six months, I would make a profit in that I would have bought $7,854.32 NZD which presumably would retain its current purchasing power. But the USD at USAA would have lost most or all of its purchasing power.
I want a fixed rate loan because in the event it went the other way—deflation—I would be okay because the USAA check would pay the loan off even thought it would normally have become harder to pay off in deflation.
I borrowed the $6,700 on our Home Equity Line of Credit (HELOC). I will pay it back down when I get the USAA check.
By the way, the old heloc—with USAA—had a rate that is the same as the new one at Wells Fargo—something like prime plus .75. But USAA has a 4.99% minimum rate whereas the minimum rate at Wells Fargo is 2.99%. Big difference.
So you USAA members who heard that USAA was always a good deal back when you were 21—and have never checked to see if it’s still true—should shop around.
There is a reason we only had one VPP policy still at USAA recently. We moved the homeowners, umbrella liability, car, etc. to State Farm years ago because they were cheaper and more willing to write the policies.
The old gray USAA she ain’t what she used to be.
So this illustrates how should look at your balance sheet and react to any USD amounts you find there. Get them into hard assets or selected foreign countries ASAP. When you are forced to accept a delay as in the example above, figure out a simple, cheap way to hedge the risk of hyperinflation during the wait.
I told my bank, First Republic, to send the wire at 10:25 AM on May 20, 2013. They charged me $25. The amount I wired was $7854.32 NZD. The deposit appeared in my account in New Zealand on May 22, 2013, which is actually May 21, 2013 US time. Wow! That’s fast!
But the amount my account got credited for was only $7,829.32 NZD. Apparently either my New Zealand bank’s intermediary HSBC took $25 NZD. There was also an “RWT” withdrawal of $2.76 NZD on my New Zealand bank statement. I’m guessing that means receive wire transfer. So I paid $27.76 NZD on the receiveing end for the wire transfer. In USD that was $27.76 NZD x $.8136 USD per NZD = $22.59 using the Wall Street Journal 5/24/13 NZD-USD conversion rate.
My bank’s outgoing charge was the lowest I have ever paid. HSBC’s charge was the highest I have ever paid a receiving bank.
Charles Schwab Bank gives you three free SWIFT wires per year if you have less than $500,000 in your account; unlimted free ones if you have $500,000 or more. I should have used one of my three free ones, although I had already sent the wire by the time I learned about Schwab.
The USAA refund check for $6,76.67 arrived 11/12/13. I sent to the HELOC lender to reduce the balance of that ARM by that amount.
John T. Reed